Why Mergers Fail *I. Introduction
There is considerable evidence that a large share of acquisitions made in the U.S. areunprofitable
or that they lead to reorganization and/or divestitures of many of the mergedassets not long after the merger. Why does this pattern emerge? Why is it that the factors thatoriginally motivated the merger did not yield the anticipated value?To examine why many mergers have failed, it is useful to consider the motives behind theacquisition. Some of the most often cited potential benefits to mergers include operational,marketing, and financial synergies (including traditional scale economy rationales), gains inmarket share (and, hopefully, market power), and R&D improvements. This paper uses a multi-faceted approach to explore the determinants of merger outcomes, focusing on the key structuraland valuation factors that drove the companies to merge.To analyze merger success and failure, we analyze the abnormal returns to the mergedcompany, whereby company returns are compared over a period of time to a market capital-weighted index of comparable equities. Abnormal returns are calculated over one, three, andfive years and are adjusted for the market performance over the specified years. The sample of mergers used in this study is a group that was reviewed by the government for potential antitrustviolations, most of which were challenged (though eventually consummated) and all of
*An earlier version of this paper was presented at the International Industrial Organization Conference in Boston,April 2011. We thank John Kwoka for his helpful comments on that draft.